The Financial Conduct Authority (FCA), the UK financial regulator, confirmed to the Financial Times on 30 December 2018 that it was investigating 18 businesses involved in the sale of cryptocurrencies. The regulator has also issued alerts and warnings about dozens of companies suspected of cryptocurrency investment fraud. Currently, the transfer, purchase and sale of cryptocurrencies are not regulated in the UK. However, companies that sell regulated investments with an underlying cryptocurrency element may need FCA authorisation to do so depending on their activities.Read More
The UK Financial Conduct Authority (FCA) Executive Director of Strategy and Competition recently delivered a speech at The Regulation of Cryptocurrencies event in London. In his remarks, Chris Woolard outlined several steps the FCA is planning to take to combat risks in the cryptoasset market:
- to help firms better understand the boundaries of current regulation in relation to cryptoassets, the FCA will consult on perimeter guidance by the end of 2018, helping to clarify which cryptoassets fall within the FCA’s existing regulatory perimeter, and those that fall outside;
- HM Treasury (HMT) is to then consult on whether the regulatory perimeter requires an extension to capture cryptoassets that have comparable features to specified investments, but currently fall outside the perimeter;
- the FCA will also consult on a prohibition of the sale to retail consumers of derivatives referencing certain types of cryptoassets (for example, exchange tokens), including contracts-for-difference, options, futures and transferable securities;
- to combat financial crime risks, HMT will undertake one of the most comprehensive responses globally to the use of cryptoassets for illicit activities by applying and going further than the existing directive, the fifth EU Anti-Money Laundering Directive (5AMLD);
- HMT will first consult and then legislate on how to transpose 5AMLD and broaden the scope of anti-money laundering and counter-terrorism financing regulation; and
- HMT plans to complete further analysis on whether regulation could meaningfully and effectively address the risks posed by exchange tokens and what, if any, regulatory tools would be most appropriate and then consult in early 2019 on whether and how exchange tokens, as well as related actors such as exchanges and wallet providers, could be regulated effectively.
The UK’s Financial Conduct Authority has launched its Green FinTech Challenge. This is aimed at firms developing green financial technology solutions that need specific regulatory support to bring their proposition to market. The Challenge is designed to support innovation and growth in the Green Finance sector as part of the UK government’s Green GB Week which started on 15 October 2018.
Firms that require specific regulatory support are invited to apply. The Challenge will provide support to a selection of firms developing innovative products and services to assist in the UK’s transition to a greener economy. It is open to start-ups, incumbents and technology providers.
The UK Cryptoassets Taskforce has recently published its final report. The Taskforce comprises HM Treasury, the Financial Conduct Authority and the Bank of England and was formed in March 2018.
While the use of cryptoassets for illicit activity remains low in the UK, the Taskforce concludes that these risks are increasing and the use of cryptoassets for money laundering is growing. The UK authorities will bring all relevant firms into anti-money laundering and counter-terrorist financing regulation. This action will go significantly beyond the requirements set out in the European Union Fifth Anti-Money Laundering Directive. The UK government will consult on its proposed actions and will legislate during 2019.
On 19 September, the UK House of Commons Treasury Committee published a highly critical report of the state of UK crypto-asset regulation. Crypto-assets themselves (i.e. those designed primarily as a means of payment / exchange) are not within the scope of UK Financial Conduct Authority (FCA) regulation. This is because crypto-assets generally will not meet the criteria to be considered a specified investment under the Regulated Activities Order (RAO), nor would they typically qualify as ‘funds’ or ‘e-money’ in the Payments Services Directive and the E-Money Regulation 2009.
Twelve financial regulators and related organisations, including the UK Financial Conduct Authority (FCA), announced on 7 August the creation of the Global Financial Innovation Network (GFIN), building on the FCA’s proposal earlier this year to create a ‘global sandbox’. A list of GFIN members is here. The network will seek to provide a more efficient way for innovative FinTech firms to interact with regulators. It will also create a new framework for co-operation between financial services regulators on innovation related topics.
The UK Financial Conduct Authority (FCA) has issued its recommendations for changes to P2P lending regulations for loan-based crowdfunding platforms. Based on the FCA’s findings it invites responses to rule changes for loan-based firms which cover proposals to:
- ensure investors receive clear and accurate information about a potential investment and understand the risks involved;
- ensure investors are adequately remunerated for the risk they are taking;
- provide transparent and robust systems for assessing the risk, value and price of loans, and fair/transparent charges to investors; and
- promote good governance and orderly business practices.
By Judith E. Rinearson and Rizwan Qayyum
On June 11 2018, the Financial Conduct Authority (the “FCA”) issued a “Dear CEO” letter, which provided guidance for banks on how to handle the growing risks associated with “cryptoassets”.
The FCA defines “cryptoassets,” using Bitcoin and Ether as an example, as “any publicly available electronic medium of exchange that features a distributed ledger and a decentralised system for exchanging value.” While acknowledging that there are “many non-criminal motives” for using cryptoassets, the letter asserts that these products can be abused because they offer “potential anonymity and the ability to move money between countries.”
In a speech to Innovate Finance 2018 on 19 March, Christopher Woolard, Executive Director of Strategy and Competition at the UK Financial Conduct Authority (FCA) talked about the demand from FinTech firms to operate internationally and the FCA working with partners from around the world to consider options for a global sandbox. He said that the potential of such a project is huge – from solving global problems like money laundering to reducing the regulatory burden of compliance. Currently there is no joint sandbox programme with other regulators for firms to participate in. Such a project represents new territory.
Rob Gruppetta, Head of the Financial Crime Department at the UK Financial Conduct Authority (FCA), recently gave a speech at the FinTech Innovation in Anti-Money Laundering (AML) and Digital ID regional event, London about “Using artificial intelligence to keep criminal funds out of the financial system”. He considered whether machine learning and artificial intelligence (AI) techniques could help. Better transaction monitoring is not the only way AI can aid the fight against money laundering. The Financial Stability Board (FSB) published a report on 1 November about the impact of AI that identified other ways it can help. Examples include AI-driven anti-impersonation checks that evaluate whether photos in different identity documents match, and using machine learning to identify customers that may pose a higher risk and so warrant, say, a deeper probe into the sources of their wealth.